Contractors, don't be fooled by imposter umbrella companies

If you read the tabloids, watch current affairs programmes or have an association with certain trade unions, you will no doubt have seen the term ‘umbrella company’ bandied about quite a lot lately and not exactly in a glowing light, writes Lucy Smith of All Umbrella Companies Are Equal (AUCAE).

The union UCATT has declared that umbrella companies are ‘exploiting’ construction workers; The Mirror claimed that they are a ‘ploy concocted to rip-off construction workers’ and Channel 4’s Dispatches programme on Monday night dedicated much of its time to exposing “so-called” umbrella companies that pay below minimum wage.

So, is it all true and as ghastly as they’re making out? Well, it all depends on how you define an umbrella company.

The umbrella company you actually want

The traditional umbrella model caters to highly skilled, highly paid workers who opt to be employed through an umbrella company rather than operating through a limited company (or Personal Service Company). These individuals will work on a succession of assignments, typically in the IT, Financial, Banking and Engineering industries where their skills are greatly prized and required for specialist projects. The umbrella company will engage the worker under a full, overarching contract of employment which means that they operate PAYE and the individual will be entitled to all statutory employment rights.

Unfortunately, there are companies running completely different business models who are calling themselves ‘umbrella companies’ and, in doing so, have attracted the rather negative attention of the media and quite rightly! As I’ve previously said, it is these bogus brollies that justify UCATT’s outrage.

Three ‘umbrella’ adverts to click clear of

But as far as contractors and other workers are concerned, how are they meant to tell the difference between a traditional umbrella company (good) and the sort of dodgy providers (bad) who are getting the unions all bent out of shape?

If you see this type of advert:

90% After Tax Umbrella Co ~ 100% Compliant‎

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Tax-Efficient Pay ~ Request Free Tax Illustration ~ QC Approved

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Retain 90% of Your Income ~ 100% HMRC Compliant ~ Free to Set Up

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You will be looking at a promotion from what is, in effect, a tax avoidance scheme i.e. it serves no purpose other than to avoid tax. This type of scheme really, really upsets HM Revenue & Customs and they are going to great lengths to make sure that contractors who use them suffer unspeakable torment, just check the ContractorUK Forum’s thread HMRC Scheme Enquiries for proof!  In short, with these adverts, click clear!

If you see this type of advert online, or in your inbox:

If your agency has minimum wage temporary workers then our Personal Relief (PR) Umbrella Model is for you!

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It’s fully compliant and meets HMRC rules! This has never been done with umbrella services and can save ERNI!

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You will be looking at a scheme that will ask you to register as a sole trader (the minimum wage rules don’t apply). However, unless you are not under the supervision, direction and control of the end-client (and can prove that you're not), the practice is unlawful. Again, with these adverts, click clear!

There’s a third type of advert doing the rounds which we also advise workers to avoid:

Expenses NOT claimed?!

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With us, your unclaimed expenses won’t go to waste!

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Tax relief on unclaimed expenses is what we do!

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As the advert shows, the provider encourages you, the prospective worker, to claim for tax relief on ‘expenses’ even though you haven’t incurred any costs. This model is referred to as ‘pay-day-by-pay-day’ and has attracted the attention of the folks at HMRC (and not in a good way). Meanwhile the Autumn Statement last month said paying reimbursed expenses as part of a salary-sacrifice scheme would be outlawed.

There are many variations on a theme from these types of companies putting out the above three adverts, but none of them will engage their workers under a true contract of employment, so you won’t have any employment rights whatsoever. They will undertake practices which will draw unwelcome attention from HMRC to you, their workers, which could result in penalties and fines.

Channel 4’s frightened me, what should I do?

So for contractors and other workers considering a brolly, the upshot of the recent furore is –

Most importantly, simply do not be taken in by the umbrella sector’s imposters – those firms who are dressing up as genuine umbrellas! As the mainstream media have finally cottoned on to, these operators will exploit you, rip you off and generally make your life a misery.

Editor's Note: Related Reading -

Umbrellas wary about the end of dispensations

How to spot unscrupulous umbrellas overseas

Google shows how some brollies are lagging behind the law

Contractors' Questions: Is this is a pitch to work via a Pyramid-style scheme?

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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